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Elizabeth Warren: TARP is not a victory yet

Elizabeth Warren does not share Timonth Geithner's rosy view of the end of the AIG bailout. |
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The Treasury Department has been heavily spinning TARP since Labor Day, and the public relations offensive will accelerate this week, when the department’s authority for new lending under the program expires. But despite the Treasury spin, it won’t be the end of the program. As Geithner conceded Thursday, it will be years before the government knows whether all of the bailout money for AIG will be returned, and this will depend on investors’ confidence in the company and in the stock market in general.

Warren already was on record warning that the uncertainty over the repayment from AIG and other recipients of bailout money means that declaring victory on TARP was premature. “Make no mistake, we are still at risk for serious losses,” she said in June.

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She argued that Geithner, who in 2008 oversaw the rescue as president of the Federal Reserve Bank of New York, didn’t adequately consider alternatives to government aid that would have penalized the risk taking on Wall Street and thus discouraged future recklessness. As a result, more bailouts may be the only option in the next crisis.

“The greatest consequence of TARP may be that the government has lost some of its ability to respond to future crises,” Warren said.

A Treasury official said the new financial reform law will discourage the idea that the government will bail out big banks. Rules will be tougher for banks that take on more risk, and failing banks will be liquidated under the law, he said. Also, the Federal Reserve System’s bailouts of a single company, as with AIG, are prohibited, he said.

But critics say the reform clearly hasn’t ended the presumption that banks are “too big to fail.”

Peter Wallison of the American Enterprise Institute noted that there is now nearly one-half a percentage point difference in the costs of borrowing for small and large banks. A report by Warren’s panel noted that Citibank said that government guarantees had raised its debt rating five notches over what it would otherwise have been.

Furthermore, TARP was only one part of the government’s rescue of the financial system, and the full picture is not so positive. In fact, at the same time that banks and auto companies have been steadily paying back Uncle Sam for money they borrowed under TARP, the government has been lending more money to prop up the financial system — in a big way.

In the past year, the government’s overall commitment to the financial rescue has risen from $3 trillion to $3.7 trillion — an increase nearly as large as the controversial $750 billion commitment to TARP in 2008.

Barofsky, whom Congress put in charge of overseeing the government’s financial rescue, made that estimate in July in a 282-page report that generally sustained the Obama administration’s version of TARP’s success at recouping investments. Barofsky pointed out that TARP, based at the Treasury Department, was only a fraction of the government’s lending through other Treasury programs and parts of the government.

However, other government commitments grew sharply. The largest increase, according to Barofsky’s report, was the $500 billion jump in the past year of government money committed to propping up the housing market, most of it through Fannie Mae and Freddie Mac, the formerly private government-chartered home lenders that were seized by regulators in 2008.

This commitment could get even larger. While Congress put deadlines on TARP repayment and eventually lowered the program’s size to $475 billion, there are no limits on Treasury commitments to Fannie and Freddie. After initially setting a $400 billion limit on outstanding commitments to the two housing companies, Treasury unilaterally lifted the limitation a few days before last Christmas, when Congress was in recess.

Readers' Comments (25)

This is yet AGAIN another example of why the American people did not want any bailouts of Wall Street or the Banks. No matter how Obama and the Democrats try to spin it this is their mess. They are the ones who did not LISTEN to the people. Bush may have started it but that was only a temporary bailout loan until Obama took office and decided what to do. So the responsibility is all the Democrats and they are still trying to rationalize their actions every chance they get, and this is two years later ? What does that tell you ? They know they made a big mistake. Now the American people are stuck with perpetual unemployment and Wall Street and the Banks giving out mega bonuses ? And they wonder why the American people are FED UP with them ? Wait until November.

Bush only started the bailouts and left it up to the Obozo administration to decide whether or not to continue on with them after Obama took office. Obama chose to forge ahead with the bailouts even though the American people said "NO" The responsibility rests squarely on Obamas shoulders, like it or not. Yes the American people know who is at fault here, Obama and the Democrats !

Unforetunately many who comment just want to assign blame. What is your solution? Contrast your best idea with the policy put in place. I believe proping up Fannie & Freddie short term makes sense. Do we want a bunch of housing fallout while we are working to get the economy going?If you let it all crash..where are we then? Turning the ship of state isnt easy. Perhaps TARP-AIG could have been done differently..but long term it may work-out. The Moral Hazard is a big Issue..but some action was required IMO.

Unforetunately many who comment just want to assign blame. What is your solution? Contrast your best idea with the policy put in place. I believe proping up Fannie & Freddie short term makes sense. Do we want a bunch of housing fallout while we are working to get the economy going?If you let it all crash..where are we then? Turning the ship of state isnt easy. Perhaps TARP-AIG could have been done differently..but long term it may work-out. The Moral Hazard is a big Issue..but some action was required IMO.

Actually, out of all the stimulas packages, TARP has been the most succesasful, as the majority of tghe banks have or will have paid back and most have paid their interest payments. It was a targeted solution, that stabilized the banks. However, Obama's policies and the main Stimulas are failures, as they go against the free market policies that made our nation great.

Spending money faster than we can make it: Obama took 500 staffers to London for the G-20! 500! He amazed the Brits at how ostentatious he is! Five hundred people: 12 teleprompters, 3-4 helicopters, 35 vehicles, 5 doctors, and maybe even a person to trim his ear hairs!

And he has the gaul to tell us to 'be patient, trim your budgets' and we will get through this economic downturn! He hasn't a clue! And what about the executives he blasted for riding in their jets to DC - Hypocritical!

And where is the US Press? Do we have to get our news from European sources to get the truth? "The president is entitled to all the security, communications and support he feels neessary to do his job but surely, when we're trying to project a more restrained, humble image to the world, the president's huge retinue could be scaled back to something less than the triumphal march from "Aida". Posted by Dale McFeatters, Scripp's Howard News Service.

And you think TARP is a victory? For who, the Bankers? They made millions at our expense. It will be a long time before the truth is known, and the first fact will be that nobody in the Obama Administration lost money! Waters and Rangel made lots, too! Barney Frank will never be considered poor - ever! And George Soros, well, let's just agree that he owns the Democratic Party, so he will never really need to work again. Lots of questions to answer before this is considered as "good".

“By providing a complete rescue that called for no shared sacrifice on the part of AIG and its creditors, the government fundamentally changed the rules of the game on Wall Street. As long as the biggest companies in America believe that you and I will bail them out, the worst effects of the AIG rescue will linger.”

This Bush/Paulson/Geithner TARP bailout of Wall Street through AIG was a travesty of Capitalism. Every one of the Wall Street banks, and other financial institutions who had "Hedged" their risky bets through AIG were paid off at 100%. AIG gave their executives $180 Million in bonuses and left the American taxpayer on the hook for any losses.

No one on Wall Street took a "haircut" in this bailout, in fact some made out rather nicely by being able to buy up competitors for pennies on the dollar and grow LARGER by doing so.

It's a little late now, and figuring in the politics of those instituting TARP favoring BIG BUSINESS over "We, the People", what should have been done is to take all those involved in bringing down the economy out to the woodshed for a sever lesson in economics 2010. "We, the People" had to stop the panic and get the financial markets operating again, but a strong lesson could have been taught. We could have offered to loan AIG and others only 60% of their losses and at higher interest rates than they received. The companies could have resumed operations, but would have received a stinging lesson for their stupidity and hubris rather than the "sweetheart" deals they did receive.

TARP may result in not costing the American taxpayer anywhere near the original $700 Billion first demanded of congress by Bush/Paulson, but the result of TARP, the stupidity and hubris of Wall Street remains, until next time.

Under the new repayment plan, the government will convert its 80 percent ownership stake in the company to common stock and sell it off over the next few years. Recouping that investment will depend on AIG’s continued success and the strength of the stock market. If either falters, taxpayers could lose money or be stuck with the company longer than Geithner hopes.

TeamPOLITICO: Oct. 4, 2010 - 4:41 AM EST

The panel found that while TARP was needed to stabilize the financial system, it has failed to fulfill its statutory responsibilities to help reduce home foreclosures and to “maximize overall returns to the taxpayers.” TARP, the panel found, “was mismanaged and could post significant costs far into the future.”

TeamPOLITICO: Oct. 4, 2010 - 4:41 AM EST

there are no limits on Treasury commitments to Fannie and Freddie.

The first paragraph indicates that I can get my money back now if I buy the stock the government currently holds.......How did I get my money back if I'm also buying the common stock? Fuzzy math.

The second paragraph indicates the reality that certain people, banks, and institutions like Goldman Sachs benefited from TARP- not the taxpayer.

The last paragraph says it all. But the administration has officially declared TARP being repaid, GM has repaid, and the recession over.

Americans may not understand the complexities of Wall St. derivatives, but we can sure figure out what has been going on here.

What is your solution? Contrast your best idea with the policy put in place. I believe proping up Fannie & Freddie short term makes sense.

The best course of action was to fail. AIG is an insurance company primarily. That means the world would not end if their policies ceased to exist. Someone else would have grown to fill the void eventually. GM and Chrysler died when the union and upper management gutted the profits out in the labor deals of the late sixties and seventies. They are just on life support now using taxpayer money- they should have died as well.

Fannie and Freddie are my favorite. What they hold is mortgage paper at inflated prices. It's just paper- so is money. What does either company supply that is critical to life support and security in this nation? Reset all the paper to current appraised values and adjust the mortgages accordingly. What's the difference of a one time major write down versus these boondoggles that only aid the very rich or powerful? Who do these people think they are fooling here?

This is the irony here. We are being told that our money is needed to bail out their money. Whose money is it really? It's all just paper. The choice is severe pain with a rapid healing versus ten or twenty years of dull pain.

Geithner said the plan was designed to raise private funds, as well as use government money, to encourage investors to buy the assets. .......TARP 2 but not called that by the administration.......Called that by business sites.

The action is NOT the same as the Bush administration's initial TARP to the financial meltdown, which Geithner praised while saying that it did not go far enough and suffered from a lack of transparency.

Geithner supports $1 trillion in new lending through an expanded Federal Reserve program.